This post has been the hardest to write as there are so many different ways to building wealth. I have been thinking that there are many similarities to working towards having a healthy lifestyle at this step. The foundations of both these goals are pretty generic. Know what you put into your mouth, or in our case what you spend (Step 2-4). Understand where we are at with our inner health and current weight, or with finances, knowing what we have to work with, ie, our Networth, debts, and our possible surplus each month.

Once you know all the basics, it can get tricky because there are so many options. To be healthier you could do Keto, meal replacements, meal deliveries, intermittent fasting, juice diets, eat only ‘xyz’, etc. So many ideas and choices! And like health, building wealth can seem just as daunting with so many people doing different things that get them from A to Z with lots of different stops/turns in between. We have total FOMO and are pulled this way and that, and then we think nothing works because we are stopping and starting.

I am rambling because I want to stress that the pointy end of Building Wealth can have roadblocks and I think this is where a lot of people just shrug their shoulders and give up continuing to learn, grow and try. I know I have struggled with this part. Sometimes I have been stuck for a decade! There are sooooo many options and we can have ‘analysis paralysis’, shut the book, and forget about it because it’s way too hard.

Just like with a healthy eating plan it seems so long and slow to get to your goal, you give up, when really THAT is the time to keep moving, make a choice and stick with it AND set aside time every month/quarter/year (you decide) to re-evaluate and ensure that things are running well, (for example things like Step 5 – review, reduce method, or Step 8 – calculate your Networth and overall income vs expenses ratio)

I am going on about this a bit as it is really important. THIS is YOUR WHY, this is where your future can change from now. THIS is really important.

So shall we dive in and INVEST in YOU? 🙂

Okay, we have our expenses sorted and know how much we need to put aside for our living expenses and working on reducing our consumer debt. We can move into the BIG and exciting stuff now.

having an Emergency Fund

But first, we do need to discuss a buffer account. Some like to call this an emergency fund. To me, this is your backup, for when life gets in the way of plans. It happens and usually when you are trying something different. I like the example of starting a diet and heading into work with your lunchbox and a plan, then they have a birthday cake for someone AND it’s your favourite. Really annoying. Life can be like that sometimes. You start with your plan and divvying up your money into the right expense buckets and … BANG, something happens and you need cash fast. An emergency fund can give you peace of mind, help you sleep at night and keep you on track with your goals.

More importantly, it keeps a set amount aside for life, so that when you start investing you don’t have to tap into it at the wrong time because of a life emergency.

So…we need to set up an emergency fund (EF).

Let’s start with the first $1000 – $2000. If you have the cash available, organise to put this into its own online savings account and name the account Emergency Fund so it can help reduce the temptation of transferring money out when it’s NOT an emergency. This can be built up over time so it is equivalent to 3-6 months worth of your monthly expenses. Start by trying to sell anything around the home if you can and put that towards this EF. Next, use the surplus from your expense review in STEP 8 to put towards your EF. Set a goal! For example, to get to the first $2000 quickly, and then to get to 3-6 months of your monthly expenses within a year. Break it down into monthly/weekly amounts and add this as an ‘expense’ like you would pay for a loan.

Consumer debt needs to be first off your list, as we discussed in STEP 8, do that first and then make sure at the same time you set boundaries around your expenses so you don’t fall back into consumer debt.

I have an index card on my laptop to remind me every day of what I agreed were my expenses and my buckets. I even have a monthly saving/investing goal so it is always close to me.

budget on an index card

“Begin with the end in mind” – Steven Covey

We touched on this in STEP 1 with your mindset and thinking about how you are the keeper of your money and can control it. Back to your notebook, let’s write some thoughts down on how you want your life to look like when you retire. Some prompters for you to work out your expenses in retirement:

  • When would you like to retire? nb: you know that after 60, you can transition to retirement in Australia. Work part-time and draw a part super-pension (tax-free). It’s only if you want a Government Aged Pension that you can’t obtain until you are 65-67, that is why we think of retirement as 65-67 years old.
  • Where will you live?
  • Will you travel? How many times a year?
  • Will you buy a car every x years? What type?
  • Rent or be mortgage-free?
  • Living expenses (food, petrol, utilities, telco, insurances)
  • Will you need money for large gifts to assist kids/grandkids/family?

Below is my personal notebook example.

Planning Retirement
Planning FIRE

Start with what you want as an income at the end of your accumulation/investing phase. That is, when you want to retire and live off your passive income. As an example, we have a goal to have a passive income of $150,000 pa. To generate that kind of income we will need to have dividends from shares and rental income from our investment property.

“Passive income is income that requires no effort to earn and maintain” – Wikipedia

  • My notes on this are as follows:
    • Rental Property – Rent is $720pw = $37,000pa
    • Therefore, EFTs/Shares/Super dividends need to be $113,000pa

So for the rental property, we need to pay that loan off to have the rent as income and we will do that when we are retired as it will be tax-free (Tax-free income of $25k pa each in TTR – transition to retirement phase). In order to pay for this investment property, we would be selling our PPoR (home) and some of the proceeds would go to pay off the investment property.

With the shares/superannuation, in order to generate $113,000pa in dividends, it would mean approx $2,200,000 in the portfolio (I used Noel Whittaker’s calculator – see below example). I am using the approach that I do not want to eat into the capital for as long as possible as I have a deep core desire to leave generational wealth to my children.

THIS is a HUGE REACH for us. I do kind of feel silly putting that type of number down especially when we are at $370,000 at the moment with only 8 years to go! BUT at the same time, I feel excited to have a scary goal. Putting these unimaginable numbers out into the universe!

Noel Whittaker Superannuation calculator

Another way to work out THE number you need in your portfolio is to times your yearly retirement passive income needed by 25 – eg: $113,000 x 25 = $2,825,000. Keep in mind these numbers relate to 2021 and do not take into account inflation. Those kinds of variables should be added to any calculations so that you are using the correct targets. Either see a Financial Planner or dive deeper into more research/calculators to ensure you do consider these variables.

This one from @pearler is a great little calculator too!

WAYS to get there

Now we need to get there. This part is for you to become intimate with your numbers so that when you do discuss with a professional, you know your starting point, how much you need to get there and the important number, how much you can put towards the goal at the moment and any future contributions.

I am using another Noel Whittaker calculator to see how we can grow our superannuation to the goal amount. With the employer mandatory contribution of 9.5% and both of us salary sacrificing for the remaining 8 years, we are not even close to the goal. Our FP simulated our personal plan with extra contributions if/when we sell our home and injecting $600k into our super to boost our final amount at age 60. I can’t seem to find an online calculator that can do this for me. I have added the example of Noel’s calculator to show what it simulates our portfolio value will be at age 60.

Noel Whittaker calculator

I have also added an example of a couple that have 20-25 years left to aged 60-65 and shows how with only the employer contributions they can get to the goal with minimal fuss.

Superannuation Salary contribution calculator

I mention professional advice a lot as I see the benefit on so many different levels. Firstly, having a sounding board to go through your individual numbers and goals is valuable. A lot of calculators are great to play around with but they are generic and don’t take your personal data into account (things like your tax, additional contributions, mortgages, and changing legislation that may benefit you). Secondly, FPs can assist in cementing plans to build your foundation and review on a bi-yearly timeframe as life still happens and strategies may need to be tweaked. Lastly, they can plant seeds for other options that you may never have thought of so that you can research and learn more on your journey for Financial Literacy (they can be great teachers if they see you want to know more!)

“Set stretch goals. Don’t ever settle for mediocrity. The key to stretch is to reach for more than you think is possible. Don’t sell yourself short by thinking that you’ll fail.” – Jake Welch

In the last step, step 10, we will review options that are out there that may help in boosting the numbers if there is a gap. At present, our personal goal amount is still out of easy reach AND we would have to sell our home to get close. I would like to review the other strategies that have been shared by other personal financers to see if they will work in our situation. Many hours are poured into this type of thing and I sometimes wonder if the ‘set and forget’ is a” better approach (Netflix and my books are waiting for me!) AND then I remember that “if it is to be, it is up to me”. Listening to people on social media, reading money books, and even talking to an FP is only a part of the journey. Getting to know your numbers and putting plans in ACTION is key for Future You and reducing stress about money.

“This is difficult but possible”

If you want to delve into this topic more, I’ve listed some further reading, calculators, podcasts and websites I recommend.